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Briefing
September 2015
The minimum wage: A motor for
growth or a brake on the economy?
SUMMARY
Setting minimum wages are a direct way for governments to influence wage levels.
Even though they are one of the most analysed and debated topics in economics, their
impact on (un-)employment, growth and poverty remains ambiguous. For some
experts, the rise of minimum wages will lead to job losses, as it increases the cost of
labour. Others argue that minimum wages not only prevent the creation of a 'working
poor' class, but create jobs by increasing employee purchasing power. The empirical
evidence from OECD countries does not provide a clear answer.
Over recent years, the focus of the debate has switched from the macro-economic
effects to the social dimension of minimum wages. A statutory minimum wage is
increasingly considered a useful tool to ensure fair wages and social inclusion.
The international financial crisis widened the gap on minimum wage levels between
many Member States. At the same time, it gave new momentum to the debate on
'just' minimum wages, low wage immigration and a harmonised minimum wage rate
for all Member States. The idea of combining minimum wages with fiscal policy
measures such as tax relief, earned income tax credits or additional income support
provisions to increase low paid employees' incomes is a subject for further discussion.
The European Parliament (EP) has adopted several resolutions against 'in work
poverty' and social exclusion over recent years. The minimum wage is increasingly
considered to be a tool which ensures fair wages and social inclusion.
In this briefing:
 Background
 The neoclassical theory of minimum wage
impact
 Arguments for and against minimum wages
 Minimum wages in practice: ambiguous
empirical evidence from OECD countries
 The crisis and minimum wages: better
incomes at the expense of fewer jobs?
 Outlook: social partner positions and the
European Parliament
 Main references
EPRS | European Parliamentary Research Service
Author: Cemal Karakas
Members' Research Service
PE 568.338
EN
EPRS
Minimum wage: motor for growth or brake on the economy?
Glossary
Equilibrium wage: determined by the interaction of labour demand and labour supply, and
should, in theory, lead to full employment.
Median wage: an average wage, whereby 50% of the employees earn more and the other 50%
less.
Employment elasticity: relies on the principle of price elasticity (of demand) which measures
the relationship between price change, e.g. for goods or services, and demand change.
Regarding employment, an increase in labour costs (e.g. higher wages) would result in a
decrease of employer labour demand.
Background
In July 2015, the Organisation for Economic Co-operation and Development (OECD)
released its Employment Outlook 2015 report. Currently, 26 of the 34 OECD countries
have statutory minimum wages in place, with Germany being the most prominent
country to recently introduce a statutory minimum wage (January 2015).
According to the OECD, the international financial crisis and increased social and income
inequality have reignited the minimum wage debate. The United States and several
EU Member States are currently debating the relevance of statutory minimum wages,
as well as envisaging raising them.
In addition, some higher-income Member States are confronted with low wage
immigration which is perceived by some experts as a threat to existing wage
differentials. These developments add new momentum to the debate on a harmonised
minimum wage rate in the EU.
The neoclassical theory of minimum wage impact
A minimum wage is a direct policy means for a government to influence wage levels.
There is no 'natural' level for a minimum wage, they are set by policy decision and/or
based on an agreement between social partners.
Disagreement amongst economists on the macroeconomic effects of minimum wages
has persisted for decades. According to neoclassical economics, (the usual theory used
to explain market equilibrium), the labour market is, like any other market, a standard
competitive market with a rising supply curve and a descending demand curve.
The equilibrium wage (W0) would lead
to full employment (L0) as supply and
demand of labour are in balance (see
Figure 1). According to this theory, a
binding or statutory minimum wage
(W1) higher than the equilibrium wage
increases the price for labour by
artificially introducing a wage floor.
The supply of labour (L1) would be
larger than employer demand (L2).
This would result in unemployment,
since fewer workers are needed or
employed. However, the rise of labour
prices may not necessarily manifest
itself in higher unemployment; but
Members' Research Service
Figure 1 – Curve chart: relation between wages and
employment
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Minimum wage: motor for growth or brake on the economy?
may also take the form of slower hiring and employment growth. On the other hand, a
higher wage would not only increase the quantity of labour, but also employee
willingness to work.1
As elegant as this neoclassical model may be, it has limitations. The model is simplified,
makes general statements, and does not distinguish different industries, occupational
groups or between richer and poorer regions. Over 85% of minimum wage jobs are in
restaurants, retail, nursing homes and cleaning services. An increase in minimum wages
may have a negative impact on the employment situation in cleaning services, but not
in retail, for instance, as profit margins vary in different industries.
Furthermore, it is obvious that in major cities (e.g. London, New York) the minimum
wage is higher than in other areas. In addition, the model does not take into account
the varying qualifications and skills of employees. Employers do generally pay higher
skilled workers a salary above the equilibrium wage in order to compete with
companies for suitable employees.2
Sometimes, increases in minimum wages do not have a discernible effect on overall
employment; whilst low skilled work opportunities may fall, highly qualified jobs might
equally increase. In addition, employers often have other adjustment means, such as
reducing training, other labour costs, or non-wage benefits, and employers may reduce
working hours.3
Arguments for and against minimum wages
Proponents put forward demand-oriented and/or social arguments for a minimum
wage, which may provide:4

increased salaries for low-income employees;

economic stimulus – low income employees are more likely to spend their
(entire) salaries than higher paid groups (who tend to save any surplus) – which
could boost the economy and create jobs;

a key labour standard for ensuring fair pay, preventing exploitation and as an
anchor for wage bargaining;

attractive jobs for highly skilled workers and reduced turnover among
employees, with positive effects on a company's productivity;

reduced social and income inequality, by narrowing the gap between low and
high income employees.
Opponents prefer cost-related and competition arguments against minimum wages,
claiming:

such government price controls destroy jobs, as labour costs are often the
largest share of a company’s budget: minimum wages force employers to cut
jobs or to reduce working hours in order to maintain profits, thus contributing to
unemployment or reduced income for low skilled workers;

levels of 'informal work' increase;

inflationary effects, as higher labour costs are passed on to consumers through
increased prices;
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
lower profits for employers, thus preventing companies from investment and
business expansion and therefore from creating jobs;

governments should use fiscal means to encourage savings for low-income
families, as the best means to reduce poverty and social inequalities.
The minimum wage in practice: ambiguous empirical evidence from OECD
countries
Prior to the mid-1990s, many economists believed that minimum wages would lead to
job losses because they artificially introduce a wage floor and increase the price of
labour.
Since the mid-1990s, however, the picture is revealed as more ambiguous. Several
meta-studies have analysed dozens of empirical research papers and deduced some
interesting implications. The findings show that, apart from slight negative effects on
less skilled groups (young people and job market entrants in particular), the overall
negative impact of minimum wage increases on employment tends to be insignificant.
The 2013 meta-analysis of minimum wage studies by the Centre for Economic Policy
and Research (CEPR) concluded that higher minimum wages have no discernible effect
on employment. An academic paper from 2009 reviewed 64 studies and concluded that
the impact of increased minimum wages on employment was close to zero.5 In addition,
in its Employment Outlook 2015 paper, the OECD concludes that 'at reasonable levels,
increases in the minimum wage are unlikely to cause substantial job loss'. 6
There are, however, diverging views. According to a well-known study by Brown, Gilroy
and Kohen (1982), increases in minimum wage do affect unemployment, especially for
young and less skilled people. The employment elasticity for teenage employment, for
instance, clustered between -0.1 and -0.3.7 Studies and data collected through 1999
also confirmed the elasticity ranges overall, and the implications – that minimum wages
do eliminate jobs normally available to vulnerable groups such as young and unskilled
people.8
In their meta-analysis, the authors Neumark and Wascher conclude that 85%, or 28 out
of the 33 most relevant studies (these included research, amongst others, on Canada,
Mexico, Portugal, the UK, and the US), point to a negative (although not always
statistically significant) effect of increased minimum wages on employment.9
Minimum wages are a contested topic in major OECD countries. In the US, most states
have their own minimum wage rates. There is, however, a statutory federal minimum
wage (currently US$7.25 an hour), last raised in July 2009.
In the European Union, 22 out of 28 Member States have a statutory minimum wage
(the exceptions are Austria, Cyprus, Denmark, Finland, Italy, and Sweden). Minimum
wage levels and setting mechanisms vary significantly across countries (see table 1).10
Germany was the last major industrialised European country to introduce a statutory
minimum wage, in January 2015.
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Table 1 – Development 2000-15: Minimum wages per hour; on 1 January of each year
Belgium
Estonia
France
Germany
Greece
Ireland
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Portugal
Slovakia
Slovenia
Spain
Bulgaria
Croatia
Czech
Republic
Hungary
Poland
Romania
United
Kingdom
Turkey
Argentina
Australia
Brazil
Canada
Japan
Korea
New Zealand
USA
Currency
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
BGN
HRK
2005
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
7.33
1.02
7.61
3.31
7.00
0.67
0.86
8.48
3.25
7.76
2.26
1.24
2.83
3.11
0.89
12.03
7.48 7.63 7.94 8.41 8.41 8.58 8.75 9.10 9.10 9.10
1.14 1.37 1.73 1.73 1.73 1.73 1.80 1.90 2.13 2.34
8.03 8.27 8.44 8.71 8.86 9.00 9.22 9.43 9.53 9.61
8.50
3.51 3.62 3.94 4.05 4.28 4.28 4.34 3.35 3.35 3.35
7.65 8.30 8.65 8.65 8.65 8.65 8.65 8.65 8.65 8.65
0.76 1.01 1.37 1.54 1.54 1.69 1.69 1.71 1.93 2.17
0.97 1.21 1.41 1.41 1.41 1.41 1.41 1.76 1.76 1.82
8.69 9.08 9.08 9.49 9.73 10.16 10.41 10.83 11.10 11.12
3.38 3.48 3.57 3.67 3.81 3.84 3.96 4.06 4.15 4.16
7.81 7.98 8.19 8.47 8.64 8.74 8.88 9.01 9.11 9.21
2.32 2.43 2.57 2.71 2.86 2.92 2.92 2.92 2.92 3.04
1.32 1.45 1.55 1.70 1.77 1.82 1.88 1.94 2.02 2.18
2.96 3.02 3.11 3.41 3.45 4.32 4.41 4.53 4.56 4.57
3.28 3.46 3.64 3.78 3.84 3.89 3.89 3.91 3.91 3.93
0.95 1.07 1.30 1.42 1.42 1.42 1.61 1.85 2.03 2.08
12.54 13.28 14.11 15.88 16.27 16.27 16.27 16.27 17.44 17.51
CZK
42.50
44.70 48.10 48.10 48.10 48.10 48.10 48.10 48.10 50.60 55.00
HUF
PLN
RON
328.00 360.00 377.00 397.00 411.00 423.00 449.00 535.00 564.00 584.00 604.00
4.91
5.20 5.41 6.51 7.38 7.61 8.01 8.67 9.25 9.71 10.12
1.84
1.96 2.31 2.96 3.56 3.56 3.97 4.15 4.15 5.04 5.78
GBP
YTL
ARS
AUD
BRL
CAD
JPY
KRW
NZD
USD
4.85
5.05
5.35
5.52
5.73
5.80
5.93
6.08
6.19
2.51
2.72 2.88 3.12 3.42 3.74 4.08 4.55 5.02
2.25
3.15 4.00 4.90 6.20 7.50 9.20 11.50 13.35
12.30 12.75 13.47 13.74 14.31 14.31 15.00 15.51 15.96
1.18
1.36 1.59 1.73 1.89 2.32 2.45 2.83 3.08
7.11
7.43 7.64 7.96 8.49 9.02 9.50 9.85 10.07
665.00 668.00 673.00 687.00 703.00 713.00 730.00 737.00 749.00
2 840 3 100 3 480 3 770 4 000 4 110 4 320 4 580 4 860
9.00
9.50 10.25 11.25 12.00 12.50 12.75 13.00 13.50
5.15
5.15 5.15 5.85 6.55 7.25 7.25 7.25 7.25
Source: WSI Minimum Database International. The figures are indicated in national currency to
comparison beyond distortions caused by changes in currency exchange rates.
6.31
6.50
5.49 6.16
18.00 23.58
16.37 16.87
3.29 3.59
10.18 10.57
764.00 780.00
5 210 5 580
13.75 14.25
7.25 7.25
provide better
Minimum wage efficacy can sometimes be undermined by higher taxes and reduced
social entitlements. On average across the OECD, the total burden from income taxes
and social security system contributions amounts nearly to one third of the gross
minimum wage, with approximately identical shares paid by employer and employee.11
The crisis and minimum wages: better incomes at the expense of fewer jobs?
The international financial crisis has widened the gap in wages and minimum wages in
the EU Member States in absolute and relative terms. It provided new momentum to
the debate on 'just' minimum wages, low wage immigration and a harmonised
minimum wage rate for all Member States. In addition, the crisis moved the focus of the
debate away from minimum wages creating or eliminating jobs, to the relevance of
minimum wages for social inclusion and fair pay.
Across the OECD, minimum wages are set at around 50% of the median wage. Whether
this is a 'just' level or not, is a subject for discussion. In previous decades, minimum
wages often kept pace with the productivity rate; however, today they are often
combined with the inflation rate, or determined by political decisions or bargaining
between social partners. A 'reasonable' level for minimum wages, however, remains a
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Minimum wage: motor for growth or brake on the economy?
country-specific issue, which must take account of minimum wage interactions with
other issues, such as legislation, compliance, taxes, benefits or the economic situation,
including the right timing for introduction/increase of minimum wages.12
The OECD states
that during and
after the recession,
many
countries
relied on minimum
wages, either to
increase or sustain
low paid workers'
wages, or to lower
minimum wages as
a
crisis-related
measure.13
Table 2 – Dataset: Minimum relative to average wages of full-time
workers
Australia
Belgium
Canada
Chile
Czech
Republic
Estonia
France
Germany
Greece
Hungary
Ireland
Israel
Japan
Korea
Luxembourg
Mexico
Netherlands
New
Zealand
Poland
For some experts,
however, there is a
trade-off inherent
to minimum wages,
in the sense that
they do contribute
to social inclusion
by setting a wage
floor – at the
expense of job Portugal
Slovak
losses.
Republic
Slovenia
Spain
Turkey
United
Kingdom
United
States
Latvia
Lithuania
Romania
2005
2006
2007
2008
2009
2010
2011
2012
2013
0.575
0.509
0.400
..
0.538
0.498
0.405
0.650
0.545
0.503
0.404
..
0.522
0.508
0.414
..
0.544
0.516
0.426
0.707
0.543
0.507
0.436
0.710
0.536
0.509
0.445
0.674
0.527
0.509
0.451
0.671
0.540
0.500
0.441
0.678
0.386
0.401
0.670
0.462
0.481
0.540
0.549
0.335
0.373
0.414
0.378
0.479
0.397
0.370
0.634
0.459
0.490
0.524
0.574
0.338
0.389
0.409
0.376
0.472
0.382
0.358
0.633
0.468
0.483
0.531
0.573
0.341
0.429
0.411
0.367
0.471
0.360
0.378
0.630
0.485
0.477
0.524
0.572
0.346
0.436
0.405
0.360
0.470
0.360
0.398
0.628
0.487
0.478
0.504
0.568
0.362
0.452
0.412
0.366
0.470
0.353
0.404
0.621
0.476
0.474
0.476
0.560
0.373
0.451
0.408
0.349
0.473
0.367
0.381
0.620
0.518
0.495
0.477
0.564
0.382
0.455
0.414
0.360
0.473
0.359
0.376
0.631
0.437
0.539
0.476
0.572
0.383
0.429
0.414
0.363
0.474
0.364
0.388
0.628
0.51*
0.452
0.539
0.479
0.577
0.390
0.442
0.414
0.368
0.474
0.544
0.421
0.560
0.422
0.574
0.396
0.591
0.427
0.594
0.459
0.588
0.453
0.588
0.452
0.599
0.482
0.595
0.497
0.525
0.511
0.514
0.524
0.537
0.566
0.565
0.577
0.558
0.432
0.512
0.430
0.748
0.445
0.513
0.442
0.725
0.443
0.500
0.439
0.715
0.428
0.485
0.419
0.709
0.454
0.486
0.417
0.713
0.457
0.566
0.411
0.698
0.456
0.582
0.410
0.701
0.451
0.595
0.411
0.711
0.455
0.612
0.413
0.694
In Germany, for
instance, the newly
introduced
minimum wage is
0.450 0.454 0.466 0.461 0.461 0.461 0.467 0.472 0.469
considered
0.316 0.307 0.314 0.341 0.371 0.388 0.383 0.378 0.374
responsible for the
0.410 0.367 0.363 0.405 0.475 0.490 0.524 0.504 0.482
loss
of
about
0.469 0.427 0.407 0.402 0.457 0.463 0.450 0.445 0.516
237 000 low paid
0.441 0.419 0.375 0.409 0.453 0.439 0.471 0.472 0.496
part-time jobs, (so- Source: OECD
called 'mini-jobs'),
but simultaneously created around 50 000 (part-time) jobs liable for social insurance
contributions.
In the US, for instance, around three million (or 3.9%) of the 77.2 million workers are
paid US$7.25 or less on an hourly basis (according to the Bureau of Labor Statistics).
Due to inflation, the current minimum wage has lost more than 12% of its purchasing
power since 2009, (and 30% since 1968 when it was introduced). President
Barack Obama has announced his support for a Senate bill from the Democratic Party
that would gradually increase the federal minimum wage from US$7.25 to US$10.10,
indexed to inflation.14
In a report, the Congressional Budget Office (CBO) expects the rise in national minimum
wages may cause job losses of up to 500 000 jobs, but at same time would increase the
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wages of 16.5 million Americans and raise 900 000 people out of poverty. A study by the
Economic Policy Institute (EPI) forecasts that increased minimum wages would cost
US$35 billion, but that GDP would also grow by US$22 billion, and a net 85 000 new
jobs would be created.
The OECD states that minimum wages are a relatively blunt instrument for tackling
poverty and social inequalities, as many poor families have no working member, and as
minimum wages do not guarantee a sufficient number of hours of work to lift
employees out of poverty.15
In order to increase take home pay, the OECD, along with some experts, supports the
idea of combining minimum wages with fiscal policy measures such as tax relief, earned
income tax credits or additional income support provisions for low paid workers.16 This
unburdening of private employers, however, may not only subsidise work for poverty
level wages, at the expense of tax payers, but also encourage companies to decrease
wages further, to below the poverty line.
Outlook: social partner positions and the European Parliament
The controversy about the impact of minimum wages on (un-)employment, growth and
poverty will continue, since there is no final answer on whether minimum wages do
create or eliminate jobs. In recent years, however, the scope of the debate has switched
from the macro-economic effects towards the social dimension of minimum wages.
It is very likely that the future discussion will focus on scaling down the ratio of
minimum and median wages, as well as on fiscal contributions. While across the OECD
countries minimum wages are set at around 50% of the median wage, experts such as
those from the European Trade Unions Institute (ETUI) request the implementation of a
harmonised minimum wage rate (e.g. 55-60% of the median wage), binding for all EU
Member States. In addition, a combination of minimum wages with fiscal policy
measures such as tax benefit policies might be necessary in order to guarantee higher
take home pay for low income employees. Some European employers' associations,
however, argue that if minimum wages are set too high, they could be detrimental to
the integration of the long term unemployed.17
The diametrical effects of a high minimum wage (increasing incomes and job losses for
vulnerable groups such as young and less skilled people) makes it difficult for the
European Commission to tackle youth unemployment. The European Parliament (EP) is
aware of this difficult situation and has debated on low income and social exclusion
over recent years. The minimum wage is increasingly considered to be a tool which
ensures fair wages and social inclusion – in line with the European Social Charter of the
Council of Europe. In a 2011 resolution, the EP 'encourages the Member States to
develop minimum income schemes based on at least 60% of the median income in each
Member State.' In addition, it calls for efforts to end 'in work poverty' and inequitable
working conditions, 'through pay levels in general and minimum wage levels in
particular, which – whether regulated by legislation or by collective bargaining – must
ensure a decent standard of living.'
Main references
Back on the agenda: a European minimum wage standard, T. Schulten and T. Müller, ETUI Policy
Brief 8/2014.
Employment effects of minimum wages, D. Neumark, IZA World of Labor 2014: 6 May 2014.
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Maximum Divide on Minimum Wage, J. Mejeur, State Legislature Magazine, March 2014,
Vol. 30, Issue 3, pp. 14-17.
Minimum wages after the crisis: Making them pay, OECD, Focus on, May 2015.
Minimum wage systems, International Labour Conference, 103rd Session, 2014, Report III
(Part 1B), International Labour Office Geneva.
N. Gregory Mankiw, Macroeconomics, 7th Edition, Worth Publishers, New York, 2010.
OECD Employment Outlook 2015, OECD Publishing, Paris.
Rises In The Minimum Wage Really Do Destroy Jobs, Forbes Media, 7 January 2015.
Wages developments in the euro area – Increasingly unequal?, A. Stuchlik, EPRS Briefing,
European Parliament, PE 565.884.
Endnotes
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
On the diverging views on minimum wages and economic theory, see N. Gregory Mankiw, Macroeconomics,
Worth Publishers, New York, 2010, particularly the chapter on unemployment.
The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of
Low-Skilled Workers, J. Clemens and M. Wither, CATO Institute, Research Briefs in Economic Policy, Number 22,
March 2015.
Why Does the Minimum Wage Have No Discernible Effect on Employment?, J. Schmitt, Center for Economic and
Policy Research, February 2013.
On the arguments pro and contra, see OECD paper Minimum wages after the crisis: Making them pay, and
Maximum Divide on Minimum Wage by J. Mejeur, and Employment effects of minimum wages by D. Neumark.
H. Doucouliagos and T. D. Stanley, Publication Selection Bias in Minimum-Wage Research? A Meta-Regression
Analysis, British Journal of Industrial Relations, Vol. 47, Issue 2, June 2009, pp. 406-428.
OECD Employment Outlook 2015 report, p. 21.
Employment elasticity describes the ratio of the percentage change in employment to the percentage change in
the MW. For example, an elasticity of −0.17 means that a 10% increase in the MW would reduce employment (of
the affected group) by 1.7%.
Employment effects of minimum wages, by D. Neumark.
D. Neumark and W. Wascher, Minimum Wages, Cambridge/MA, MIT Press, 2008.
On the diverging European MW systems, see S. Kampelmann et al., 'Minimum wages in Europe: does the diversity
of systems lead to a diversity of outcomes?', European Trade Union Institute (ETUI), Report 128, Brussels, 2013.
OECD 2015, op. cit., p. 38.
OECD 2015, op. cit., p. 34.
OECD 2015, op. cit., p. 21.
The so-called Fair Minimum Wage Act of 2013 was introduced by Senator Tom Harkin (D-IA), Chair of the Senate
Labor Committee, and Representative George Miller (D-CA), Member of the House Workforce Committee. It
foresees an increase of the MW in three steps (by 95 cents each year) from US$7.25 to US$10.10.
OECD 2015, op. cit., p. 49.
OECD 2015, op. cit., p. 50; T. Schulten, WSI-Mindestlohnbericht 2015 – Ende der Lohnzurückhaltung, WSIMitteilungen 2/2015, pp. 133-140.
UEAPME, Business Europe and CEEP, Employers’ views on European Commission initiative on the long-term
unemployed, Brussels, 8 May 2015.
Disclaimer and Copyright
The content of this document is the sole responsibility of the author and any opinions expressed therein
do not necessarily represent the official position of the European Parliament. It is addressed to the
Members and staff of the EP for their parliamentary work. Reproduction and translation for noncommercial purposes are authorised, provided the source is acknowledged and the European Parliament is
given prior notice and sent a copy.
© European Union, 2015.
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